Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2017 Performance Briefing ]Q&A

Q1. How will profits be affected from the current to next fiscal year following the carve-out of part of the high-frequency components business?
A1. Under the terms of the collaboration, TDK expects to receive a filter fee of several billion yen a year after the carve-out. Also, given that the high-frequency components business that will not be transferred to the joint venture is a business with high profit margins, we will not necessarily lose all of the profits from the high-frequency components business. In addition, we have been taking several strategic actions to make up for the gap caused by the sale of the relevant high-frequency components business. We are currently estimating how much earnings we can expect to generate from next fiscal year onward. One of these actions is our strategy in the sensor business. Moreover, we expect to capture synergies through the collaboration with Qualcomm. Specifically, these synergies will drive increased earnings mainly through an increase in references. Furthermore, the rechargeable battery business, where we have continued to increase production to date, is expected to continue performing steadily next fiscal year. The recording device business has been outperforming expectations for the current fiscal year. Here, we will carefully estimate how much volume we can expect in the next fiscal year onwards.
Q2. TDK expects to record a gain on transfer of ¥149.0 billion in the fourth quarter as a result of the carve-out of the high-frequency components business. Excluding this gain, operating income in the fourth quarter can be projected at around ¥10.0 billion. This represents a projected decrease from operating income of ¥32.5 billion in the third quarter. Could you please explain this point?
A2. Ordinarily, in the third and fourth quarters, sales are heavily impacted particularly in the smartphone market. There is also an impact from a drop in capacity utilization related to the Chinese New Year. That said, we do not expect the drop in profits to be far greater than what we normally see in the fourth quarter, and we believe there are no major special factors that will impact profits.
Q3. TDK upwardly revised its operating income forecast from ¥76.0 billion to ¥86.0 billion on a basis excluding impairment losses of ¥20.0 billion in the third and fourth quarters. Could you please go over the major components of the upward revision to the forecast, separating the exchange rate impact from the actual factors behind this revision?
A3. In regard to the upward revision of ¥10.0 billion to our operating income forecast, we believe the exchange rate had a positive impact of just over ¥6.0 billion. The remaining ¥4.0 billion represents the effective upward revision to the operating income forecast. This effective increase appeared mainly in the third quarter. The main factor was the impact of higher-than-initially anticipated HDD head sales volume. Moreover, HDD heads outperformed due to slightly lower-than-expected expenses incurred in connection with the consolidation of Hutchinson in the third quarter. Also, in rechargeable batteries, net sales in the current fiscal period were largely in line with forecast on an adjusted basis, but profits were slightly higher than forecast due to utilization. Consequently, the outperformance for the full fiscal year has mostly appeared in the third quarter. In the fourth quarter, excluding the foreign exchange impact, net sales should be slightly below forecast, and profits should also fall slightly below our initial forecast on an adjusted basis. Overall, operating income outperformed forecast in the third quarter but is expected to slightly underperform forecast in the fourth quarter. As a result, we expect operating income to effectively outperform forecast by around ¥4.0 billion on a full-year basis.
Q4. Could you please go over the basis for the calculation of the gain on transfer of ¥149.0 billion?
A4. Looking at the gain on transfer of ¥149.0 billion, the consideration for the business is basically US$2.35 billion. The gain on transfer is based on gains corresponding to 100% of the shares to be transferred. However, in terms of cash, since only 51% of the shares has been transferred, the cash inflow will be around US$1.2 billion. In terms of profits, the difference between the value of 100% of the shares to be sold and the value of the assets to be sold is ¥149.0 billion. However, as noted earlier, TDK will recover the capital expenditures it has invested in the business since entering into the agreement. These and other inflows will be accretive to the income generated by the sale of the business, and extra cash will also be generated by these inflows.
Q5. Could you please go over the components of the impairment losses of ¥20.0 billion? I was under the impression that TDK had already completed restructuring. Could you please discuss the background and your decision to once again record these losses at this time in a little more detail?
A5. In regard to the impairment losses of \20.0 billion, two years ago, we had been moving forward under the premise that there would be no major impairment losses. However, in the course of making large growth investments in strategic growth products, we have been advancing a major transformation of business with respect to existing products. First, in HDD heads, as we have explained to date, we are concentrating our global wafer sites in the United States. In Japan, we are proceeding with plans to convert wafer sites to TMR sensor plants. That said, production of HDD heads at sites in Japan has been progressing much faster than initially anticipated, and the models that have been adopted in Japan are rapidly approaching the end of their product cycles. Initially, we intended to convert sites based on a soft landing approach. However, considering that product cycles are rapidly approaching their end at this time, we expect to go forward with the accounting treatment for booking impairment losses on wafer sites for HDD heads and switching the sites over to sensors. Furthermore, we booked an impairment loss on metal magnets once about two years ago. However, we recognize that the downturn in the HDD market is now having a severe impact on this business. We have now obtained mass production approval of metal magnets for wind power applications. Having obtained approval for automobiles, we intend to expand business going forward. However, given that we are now in a transition period, we have been struggling to generate earnings due to the existing manufacturing structure, which has a large number of sites and fragmented processes. We have decided that we have no choice but to forecast an impairment loss on the existing structure, while looking ahead to efforts to turnaround operations. In addition, TDK’s aluminum electrolytic capacitors are extremely strong in the automotive field and are profitable, but applications for infrastructure systems, such as motors for crude oil drilling and motors for renewable energy systems, are significantly swayed by business cycles. TDK has excessive production capacity relative to the current market environment, and the need to reshape this capacity is the main reason for recording impairment losses.
Q6. Could you please discuss how much of the restructuring benefits of ¥20.0 billion is expected to be derived next fiscal year?
A6. We expect to derive benefits of around ¥4.0 billion to ¥5.0 billion on a full-year basis. The benefits will come from a decrease in depreciation expense due to the realignment of sites.
Q7. Will TDK book any one-time costs next fiscal year in connection with the deal with Qualcomm? Also, how much of a negative impact will the amortization cost of InvenSense have starting from midway through next year?
A7. Beginning with the one-time costs related to Qualcomm, we basically do not expect to incur any such costs next fiscal year at the operating income level. We will primarily receive royalty revenue according to the sales of the joint venture. As for InvenSense, the amortization cost will not become clear until the Purchase Price Adjustment (PPA) has been calculated. Therefore, we do not currently know the exact figure. Basically, we believe that intangible assets will at one point emerge as assets subject to amortization. The annual amortization cost will be determined based on the specific fair value and how the useful life of intangible assets is set. For this reason, I would like to refrain from commenting on this matter at this time.
Q8. How will TDK put together the inertial sensor business of InvenSense?
A8. Naturally, InvenSense has competitors in the inertial sensor business. However, InvenSense has a track record of being the first among its competitors to launch 6-axis combo sensors and 9-axis combo sensors. By fully harnessing its technological superiority in this area, InvenSense has begun to enter various IoT fields, including not only mobile applications but also fields centered on drones. Moreover, TDK intends to expand non-smartphone fields by adding InvenSense products to its well-developed network in the automotive business. Microphones are being advanced by both InvenSense and TDK. In microphones, demand is showing signs of expanding to a variety of fields, including not just mobile applications but also automotive, IoT and other areas. In response, we will combine the resources of both companies to drive the growth of business in these other types of fields. Additionally, InvenSense currently has a “fabless” manufacturing model, whereas TDK has its own fabrication plants (“fabs”). By integrating “fabless” and “fab” manufacturing models, and capturing synergies in terms of costs, we also seek to provide solutions to the market in the field of microphones, where we are competitive. Moreover, we believe that sensor fusion holds considerable potential for the future. Therefore, we will adopt a strategy for expanding business over the medium and long terms through sensor solutions by adding InvenSense’s software technologies to the sensor fusion area. TDK possesses Hall sensors through Micronas, which it acquired, along with its existing temperature, pressure, TMR and other sensors. TDK’s lineup will cover all non-optical sensors. With this in mind, we will work to integrate our lineup with InvenSense and develop businesses from a comprehensive standpoint.
Q9. You noted that InvenSense has started to develop sensors for automotive use. Into which parts of automobiles do you intend to incorporate InvenSense’s sensors?
A9. For automotive use, we believe that gyro sensors and acceleration sensors will be the main products. These sensors are involved in maintaining vehicle stability, such as stability control and roll-over control. In safety applications, we believe that InvenSense’s inertial sensors are one source of significant potential. We would like to incorporate InvenSense’s sensors as well as TDK’s sensors into these applications.
Q10. Does TDK manufacture MEMS microphones in Japan? Are they manufactured at TDK’s former HDD head plants? I believe that packaging is crucial to MEMS sensors. Could you please discuss your packaging resources?
A10. At present, TDK conducts the front-end processes for microphones at Kofu and the back-end processes in China. EPCOS, a TDK Group company, possesses packaging technology for MEMS-based sensors. Going forward, we will continue to comprehensively harness these technologies to hone our competitiveness.
Q11. Could you please discuss your outlook for sales in each segment in the fourth quarter?
A11. From the third to fourth quarters, we expect sales in the Passive Components segment to decrease by about 11%, the Magnetic Application Products segment to decrease by about 10%, and the Film Application Products segment to decrease by just under 40%. Overall, sales are projected to decline by nearly 20% from the third to fourth quarter. Our exchange rate assumptions are \109 in the third quarter and \110 in the fourth quarter, so there will be virtually no forex impact.
Q12. In your discussion of changes in sales by product from the third to fourth quarter, you noted that rechargeable battery sales would decline by 40% and passive components sales would be a little weaker than expected, with sales declining by 11%, excluding the impact of the carve-out. Could you please discuss the situation in North America and China?
A12. In the fourth quarter, sales in North America have been slightly weaker than initially expected. Sales in Korea are also slightly soft. In China, sales to certain customers declined further than initially expected in the third quarter due to the impact of materials and other factors. However, partly due to the rebound in sales, sales in the fourth quarter have been slighter better than previously expected. The same trend also applies to passive components and rechargeable batteries.
Q13. In regard to the sales guidance for passive components and film application products from the third to fourth quarter, do you really believe that sales will decline as previously explained? In particular, the 40% decline in sales of film application products seems to be very large. How does this projected sales decline break down in terms of regions? Has this forecast been set based on a conservative stance?
A13. In rechargeable batteries, we do not foresee any major changes in sales in Korea from the third to fourth quarter. Next is China, where sales will decline to some extent. We expect to see the largest drop in sales in North America. We are taking a somewhat conservative view of sales in some respects, but part of the decline reflects the fact that the fourth quarter is ordinarily a time for product replacements.
Q14. At the second-quarter earnings announcement, you noted that the impact on operating income in the second half associated with the integration of Hutchinson was projected at between ¥3.0 and ¥4.0 billion, including PPA. Could you please provide the actual impact in the third quarter and your outlook for the fourth quarter?
A14. At the second-quarter earnings announcement, I believe we said that TDK would incorporate a loss of about \1.0 billion in the second half from the consolidated results of Hutchinson. That has happened largely as planned. We also said that we expected to incur restructuring-related expenses of about ¥1.0 billion. We executed restructuring in the third quarter and incurred expenses of about ¥0.5 billion, so these costs were lower than initially expected. We do not yet have a specific estimate of the amortization cost for the PPA of Hutchinson because the fair value is being calculated. This cost is also expected to be lower than initially expected.
Q15. From the current fiscal year, TDK has started to concentrate the front-end process for HDD heads in North America, and produce sensors at plants in Japan. According to initial plans, TDK was looking to terminate HDD head production in Japan over a period of about two years by around the end of next fiscal year. Has there been any change to this outlook? Also, TDK incurred expenses associated with relocation costs and low capacity utilization rates at factories in Japan in the current fiscal year. When do you think your domestic factories will get up and running as sensor factories and start contributing to earnings? If you can predict when the negative impact of these one-time expenses will start having a positive impact on earnings, could you please let us know?
A15. We still continue to produce wafers for HDD heads, and expect to continue production in the next fiscal year. That said, production thereafter will involve the models of customers, so the outlook for beyond two years from now will depend on the situation at that time. However, in the medium term, we will certainly come under pressure as capacity utilization declines at our factories in Japan. With this in mind, we are pushing ahead with approval activities for sensors in the automotive field and the ICT field. In fact, we have already obtained certain approvals. We expect to continue facing a challenging situation next fiscal year. However, we should be able to restore earnings from the fiscal year after next.
Q16. TDK will continue to operate HDD head facilities, despite booking an impairment loss. Does this mean that your HDD head operations will generate profits?
A16. Yes. Basically, the impairment losses are planned for our HDD head wafer facilities.